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China housing: bubble or just overheated?


Following a recent interview with Caixin Media, Alice Breheny (Global Head of Research) and Harry Tan (Head of Research, Asia-Pacific) answer the question: 'is there a bubble in the Chinese housing market given the recent price escalation?'

In short, the answer is no. Bubbles typically result from excessive leverage driving unsustainable price gains that are not underpinned by fundamentals (income growth).

In China’s case, the maximum loan to value (LTV) is 80% or, more commonly, 70% as required by most domestic banks. It is not uncommon to hear of 50% LTV, at least for first home purchases, as three family generations help to contribute to the down-payment. By contrast, a 2% mortgage down-payment was widespread in the US leading to the subprime crisis. Anecdotally, about 90% of new home sales are primary residences. It may be higher in top tier cities, due to the more international, institutional business and investment landscape, but subprime mortgages are uncommon, if not unheard of. Household debt is very manageable, at about 40% of GDP versus 65% in Hong Kong, 66% in Japan and 88% in South Korea. Savings too, are among the highest in the world, at around 50% of GDP. By contrast, Japan’s savings account for only 22% of GDP, and in South Korea, c.35%*.

It may well be true that, at this stage of China's economic development, housing prices look 'unreasonably' high in some cities. However, the headline grabbing surge in home prices is confined mainly to Tier 1 cities, which account for only c.5% of all new home sales. Elsewhere, price increases are more manageable (less than 20% since 2011, compared to close to 70% in Tier 1 cities)**. If China does have a housing problem, it is not a bubble, but rather a social issue. The Chinese government has recently announced a set of new cooling measures to temper price growth. Such stop-gap measures will not alleviate demand pressures: in about 10 years’ time, Shanghai and Beijing will rank among the most populous and richest global cities. It is all too reasonable to expect prices in these Chinese cities to reach the levels seen in Hong Kong, London and New York.

*Source: World Bank, 2016
**Source: National Bureau of Statistics of China, 2016


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Harry Tan

Harry Tan

Head of Research, Asia Pacific

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